Editor’s note: This article was first published in July 2017. The Bitcoin price “above $2,500” is from early July 2017, and the price and the whole cryptocurrency market have changed enormously since then.
Many people feel they missed an incredible business opportunity by not buying Bitcoin when the cryptocurrency cost just a few dollars. Today they watch its price soar above $2,500 and tear their hair out, while others hunt for newly created cryptocurrencies to get in at the start of the “price inflation”.
As we all know, even in Ponzi schemes the first ones in usually come out ahead, while the last ones get caught.
One of the main problems with Bitcoin (Ethereum and the rest), besides some of the things that are sold as advantages (decentralisation and anonymity), is the volatility of this cryptocurrency. That would be the first sign that we are not looking at a digital currency project, but at a mere speculative product, as virtual real estate was in its day.
Yes, people actually paid hundreds of thousands of euros for islands and plots of land that did not exist, simply because there were other buyers willing to pay for that literally fictitious land.
Money has only two purposes
They are storing wealth and exchange (buying things in return for money). The cryptocurrency’s extreme volatility makes it useless for either purpose. Because it is not pegged to anything (except confidence and senseless supply and demand) and is not backed by anything, everything is left in the hands of pure, unadulterated speculation. In other words, no sensible person would keep all their wealth in Bitcoin, because they know they could see it cut in half or literally reduced to zero.
Now some will say that shares and traditional currencies also carry risk and volatility. And yes, that’s true. They do carry risk and volatility, but to begin with, that volatility (usually tiny compared with Bitcoin’s) tends to have a macroeconomic explanation, and currencies are backed by their countries’ economies.
Second, when we invest in shares we are contributing to the real economy, because we are buying shares in a company. When we invest in Bitcoin, on the other hand, we are investing in something like air that has been given a price.
And third, when you invest in Bitcoin nobody stands behind that investment, and all you have is the “faith” that someone will buy your Bitcoin at the same price or higher when you decide to sell and turn it into cash.
In short, when we invest in Bitcoin we are not creating a profit for anyone except whoever sold us the Bitcoin we bought. You are not benefiting your government’s or your country’s economy, unlike when you buy bonds or company shares.
Featured image: Olgierd Rudak, CC BY-SA 4.0, via Wikimedia Commons.
.jpg){kind=link}